Selling through independent contractors
• Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside their state before they become contracts
• Creating or acquiring indebtedness, mortgages, and security interests in property securing the debt
• Owning, without more, real or personal property
• Conducting an isolated transaction that is completed within 30 days and is not one in the course of repeated transactions of a like nature
• Transacting business in interstate commerce
States are seeking to expand the types of activities and level of business which constitute doing business. For example, businesses that rely heavily on mail order sales are under attack by several states that want to impose sales tax on mail order sales despite a U.S. Supreme Court case to the contrary. In addition, the Commonwealth of Massachusetts now seeks to impose its sales tax laws on vendors who come into the state to appear at trade shows. Previously, such an action would have been considered to be an isolated transaction.
▼ Good to Know
We have researched and compiled the fees and filing information for foreign qualification for all 50 states and the District of Columbia in the State Reference Information on the accompanying CD.
Any significant physical presence or large volume of income or expense attributable to a particular state is a good indication that the LLC is doing business in that state. If in doubt, consult your business attorney.
What If You Fail to Get Permission?
So, is every LLC in the United States properly registered and qualified in every state in which it does business? No. Right or wrong, many thousands of LLCs regularly ignore the foreign registration requirements imposed by states in which they conduct business. Foreign LLC registration in California, for example, runs $800 per year in taxes, plus resident agent fees.
LLCs that engage in business without obtaining the necessary certificate of authority from the secretary of state are subject to the following potential sanctions:
• The LLC cannot sue in the foreign state and it may not be able to defend claims against it until it qualifies.
• The state can assess a penalty for each day the LLC is not qualified to do business, up to a stated maximum. (These penalties are sometimes waived where excusable neglect can be shown.)
If an LLC that has qualified to do business in a state no longer engages in the business, it can formally apply to withdraw by filing an application for certificate of withdrawal with the secretary of state. In the application, the LLC will designate the secretary of state for the foreign state as its agent for service of process.
WHERE DO YOU ORGANIZE?
Your LLC’s life begins when you file articles of organization with the secretary of state or its equivalent. Several factors will guide you in deciding which state is the best for your organization. Those factors include:
• The state or states in which your business operates
• State taxation
• Initial LLC filing fees
• Annual filing fees and annual reporting requirements
• State-specific advantages, such as privacy rights and members’ rights
As a general rule, if your business is small and operates and sells only in one state, then you should organize in your state of operation. This advice will apply to most LLCs and your inquiry should go no further. As discussed above, states generally require a foreign LLC to register and pay fees if it operates within their borders. These registration rules limit the benefits of organizing out of state, because you’ll likely need to register in your home state anyway.
If, however, your business operates in several states or if you expect to expand nationally, then you should consider organizing in the state that is most favorable for you.
You’ve likely seen advertisements touting the benefits of Delaware and Nevada corporations and LLCs. These states certainly aim to be business-friendly, and there are some benefits to larger entities.
There are many benefits to organizing in Delaware, including the following:
• Delaware law permits LLCs to liberally shield their managers from personal liability resulting from their actions as managers.
• Delaware has a separate court system, the Court of Chancery, that specifically litigates corporate and business entity matters. The Court of Chancery is widely respected and has developed a sophisticated body of corporate law.
• Delaware permits LLCs to operate with a great degree of anonymity.
• No minimum capital investment is required to form a Delaware LLC.
• The Delaware Division of Corporations is easy to reach on the telephone, although its web site needs improvement.
• Delaware organization offers some degree of prestige.
• Delaware offers incorporation on a few hours’ notice (for a fee, of course).
Delaware organization carries a few drawbacks:
• Delaware, surprisingly, has fairly poor customer services support.
• Delaware’s secretary of state’s department has developed, over the decades, dozens of unwritten, idiosyncratic rules and procedures that stifle even the most experienced business attorneys.
Nevada has emerged recently as America’s most popular corporate and LLC haven, and its features deserve mention. However, Nevada is not perfect.
The initial organization expenses in Nevada (about $280 for a bare-bones organization) far exceed Colorado’s $50 organization filing fee or Florida’s $70 filing fee. Nevada has recently nudged its fees upwards and, judging from that increase, one can reasonably expect that it will continue to do so. Also, Nevada requires organizers to name at least one member or manager in the articles of organization. This appointment then becomes part of the entity’s public record, ultimately searchable by anyone over the internet or through the secretary of state’s office. Despite this, Nevada is otherwise generally a “privacy state,” one that offers its owners (but not necessarily its managers) a great degree of anonymity. We’ll discuss Nevada’s privacy rules at length below.
But why has Nevada become America’s hottest corporate and LLC haven? Advertisements touting Nevada’s advantages appear everywhere, from airline magazines to e-mail spam. The answer is that over the last few decades, the Nevada legislature has undertaken a conscious, deliberate, and effective program to make the state business-friendly.
Organizing in Nevada offers many benefits, among which are the following, and all of which are described in detail below:
• Nevada does not tax corporate or LLC
